Bank of America, Citibank, Goldman Sachs seek safe harbor from climate reporting liability

Bank of America, Citibank, Goldman Sachs, and HSBC are among the banks operating in the US calling for a safe harbor to protect them against the liability of disclosing climate risk.

The banks are members of a nonpartisan policy and advocacy group, the Bank Policy Institute (BPI), that also spoke out against the idea of having its members investigated by government agencies or having audits of climate disclosures because they are based on a "nascent stage of verification and data inconsistencies."

The BPI, which represents universal, regional, and major foreign banks operating in the US, wrote largely in support of the disclosure of risks caused by direct climate impacts or indirect climate policies in a 9 June comment letter to the US Securities and Exchange Commission (SEC).

However, it warned the SEC against prescribing a set of rules for disclosing climate risk, "given the dynamic and evolving nature of climate disclosure in all sectors" that would open companies to litigation.

The SEC asked for public comment in late March on how it can improve the current process of reporting climate risks by public holding companies, and it is looking to propose a rule by October. However, sources familiar with the rulemaking process say the SEC may only issue an advanced notice to get feedback on what its rulemaking could look like.

The agency deemed climate impacts to be a material risk a decade earlier, but has just started to scrutinize the reports, given the complaints it has received over inconsistent disclosure.

The SEC agrees that investors need climate risk reports that are consistent, comparable, and reliable so they can use them to price risk and allocate capital, and cast a proxy vote.

Hundreds of comments

In a 23 June speech during London Climate Action Week, SEC Chairman Gary Gensler, who until now has stayed largely silent about the upcoming climate disclosure risk rule, noted the 400 unique responses that the agency has received in response to its call for comment.

"I'm really struck by the call for enhanced disclosures," said Gensler.

He added that he has asked SEC staff to consider "potential requirements for companies that have made forward-looking climate commitments, or that have significant operations in jurisdictions with national requirements to achieve specific, climate-related targets," but stopped short of indicating his position on a need for a safe harbor.

As part of the upcoming rulemaking, Gensler said he also has asked the agency's staff to look at the range of metrics, including the use of GHGs, that should be considered most relevant for reporting purposes to investors. The SEC had asked companies whether they should report Scope 1 or direct GHG emissions that are released as result of manufacturing a product, be it power or plastic; Scope 2 GHGs that are indirectly released through purchase of carbon-intensive power, heat or cooling to manufacture said product; or Scope 3 emissions that are released across the value chain and include consumption of the product.

Gensler also has asked the agency staff to consider the ways that funds are marketing themselves to investors as sustainable, green, and "ESG" or Environment, Social, and Governance, and what factors undergird those claims.

Good starting point

As Gensler pointed out in his remarks, most commenters favor a reporting regime that follows the framework outlined by the Task Force for Climate-Related Disclosures (TCFD) and an industry-specific approach included in the climate-related portions of guidelines from the Sustainability Accounting Standards Board (SASB). BPI agreed with other institutional investors that these two approaches should serve as "a good starting point," but added that not all their recommendations are appropriate for the US.

For instance, the TCFD recommended companies should report on climate risks in their public annual financial filings. BPI Senior Vice President Lauren Anderson, however, advised the SEC against this recommendation, citing "potential liability."

Climate disclosures, she wrote, possess certain features that merit an additional safe harbor beyond those offered under current law against SEC investigations and actions for forward-looking statements.

Safe harbor

Instead, Anderson said, a safe harbor specifically for climate disclosures is appropriate because it is difficult to measure climate risks, which may change over time and prove incorrect.

Currently, the Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements from private litigants, but not against SEC enforcement and investigation.

Beyond forward-looking statements, BPI also recommended the SEC should limit liability for "point-in-time climate disclosures" or time-stamped disclosures that are based on information from third parties that banks can neither control nor verify.

And it said the SEC should consider climate risk reporting in a separate document, a Climate Disclosure (CD) form, similar to the one it requires for conflict minerals. This form is separate from the annual 10K report, or the annual financial report that publicly traded companies file with the SEC.

The BPI also advised the SEC against requiring any additional climate reporting requirements to be subject to an audit or assurance process, terming it "an unduly burdensome requirement given how costly and time-consuming climate assurance is at this time."

If the liability regime is not carefully constructed by the SEC, the risk of private sector litigation as well as the risk of SEC investigation would have the consequence of discouraging companies registered with the agency from making "fulsome disclosures" to investors, Anderson wrote.

BPI stance has support

The BPI is not alone in taking this stance.

Unlike Gensler, SEC Commissioner Elad Roisman has not shied away from supporting the idea of a safe harbor against climate disclosures if they are earnestly trying to report this information.

"I worry that if we were to add a slew of new disclosure requirements—especially requirements that are not based on a materiality standard—we would expose companies (and their investors), boards, and management to numerous costly lawsuits when they are merely trying to provide information to satisfy a regulatory requirement," Roisman said at a 3 June ESG Forum.

Furnish, not file

Deutsche Bank also agrees with BPI's suggestion for a safe harbor against "unintentionally misleading amounts or statements."

Such an assurance would encourage companies to be candid in their reporting rather than submitting boiler-plate disclosures, Erik Soderberg, head of Deutsche Bank-Americas, said.

Also on board is global chemicals company Dow, which echoed BPI in stating it prefers to "furnish" climate disclosures rather than be required to file reports because it would protect companies from "strict liability standards." (Dow released on 24 June what it called its "first consolidated ESG report.)

IHS Markit CleanTech Executive Director Peter Gardett said financial firms are seeking an additional layer of protection against liability by seeking to "furnish" dedicated climate reports rather than filing them, as they can be requested during the "discovery" process of a legal proceeding.

"Avoiding an avalanche of litigation just as companies try to quantify and explain their climate risk is important for investors as well as for the firms themselves," Gardett told Net-Zero Business Daily 29 June.

In a 13 June letter, the World Economic Forum (WEF) on behalf of eight corporate partners—Banco Bilbao Vizcaya Argentaria, Bank of America, Dell Technologies, Henry Schein, PayPal Holdings, S&P Global, SAP, and Telefonanktiebolaget LM Ericsson—also asked the SEC to create a safe harbor for forward-looking statements, especially on reports based on third-party data. S&P Global is in the process of closing its merger with IHS Markit, which owns Net-Zero Business Daily.

Audited disclosures

Not all banks support BPI's stance on climate disclosures. The Amalgamated Bank, a wholly owned subsidiary of Amalgamated Financial Corp. that has roughly $6 billion in assets, told the SEC it supports "audited, tabular disclosures" of a company's estimated GHG releases that include both direct and indirect emissions, in line with the standardized approach developed by the Partnership for Carbon Accounting Financials, a collaboration of 118 financial institutions with assets exceeding $38 trillion.

Backing Amalgamated Bank's position was Norges Bank Investment Management (NBIM), the investment management arm of the Norwegian central bank that has $399.5 billion invested in listed equities and $139.9 billion in fixed income in the US.

In its 13 June comment letter, NBIM said the SEC ought to require US companies to follow climate disclosures in line with those recommended by TCFD framework so that they include information for investors on their governance, strategy, risk management, and their emissions targets.

In 2020, for instance, NBIM said only 11% of US companies were following the TCFD recommendations.

Where NBIM and BPI agreed was that the SEC—in writing its rule—could follow TCFD's logic and use industry-specific standards laid out by the SASB to require companies to report material risks as part of their regular financial disclosures, and non-material risks through other channels.

There is no question among those commenters that the SEC needs to implement climate disclosure rules, given the rapid pace of climate and ESG-related investments, and the patchwork of reporting regimes in place.

Mandatory reporting is critical because "the fragmented disclosure framework currently in place, whereby investors must negotiate with individual issuers to obtain certain material ESG information, hinders the ability of our members, and their investment managers, to effectively compare risks and opportunities across issuers," concluded the Church Alliance, which represents the CEOs of 38 church pension programs.

Posted 29 June 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst